Euro firm ahead of ECB decision; $100 oil dampens activity

By Jiaxing Li and Amanda Cooper

HONG KONG/LONDON, Sept 10 (Reuters) - Major currencies held steady on Thursday, in the face of another jump in oil prices and global bond yields, while the euro traded near two-week highs ahead of a likely rate increase from the European Central Bank later in the day. 

Oil futures remained firmly above $100 a barrel for a second day, as energy flows from the Gulf slowed to a trickle following the biggest wave of attacks on shipping by Iran and the United States since the start of the war.

More worryingly for consumers just weeks ahead of the European winter, prices of refined fuels, such as heating oil and natural gas also shot higher. The ECB is expected to tackle the inflation threat by raising euro zone rates for a second time since the war started in late February. 

The renewed inflation concerns have sent global bond yields back to multi-decade and even record highs in some countries, but have done little to draw any safe-haven flows into the dollar.

The euro, which hit a two-week high of $1.1654 on Wednesday, was last at $1.1639, up 0.1% on the day. The single currency, given Europe's reliance on imported energy, is typically one of the most sensitive to swings in the oil price. But that relationship has broken down as the war has dragged on, which has deprived the dollar of inflows.

"There's a dynamic there where ultimately, safe-haven hedge policy is a dollar. It would be expected to have traded firmer, but it hasn't happened," said Richard Franulovich, head of FX strategy at Westpac Institutional Bank. 

He added that markets were becoming less sensitive to oil shocks as the war dragged on, while debasement trades, global central bank tightening and a more interventionist Treasury Department were all drags on the dollar "washing through in the background."

The Treasury intervened, together with the Bank of Japan, to prop up the yen in late July and sold euros, rather than dollars, to do so. Earlier this week, Treasury Secretary Scott Bessent said he favoured Washington's use of financial power as a foreign policy tool and the Treasury announced a larger bond buyback operation for Thursday to cap the march higher in long-dated yields. 

CENTRAL BANK DECISIONS AHEAD

Since those rounds of official intervention in late July, the yen has gained more than 6% and on Thursday, was trading at 153.525, near seven-month highs, ahead of an expected hike by the BOJ next week.

Just as central to the outlook for the yen will be U.S. inflation data, including producer prices later on Thursday, and consumer inflation on Friday, which could prompt the Federal Reserve to raise U.S. rates when it meets from September 15 to 16.  

Traders are now pricing a roughly 60% chance of a Fed rate hike this month after Friday's stronger-than-expected nonfarm payrolls report. 

"While higher inflation may warrant tighter policy, additional rate hikes would also increase government borrowing costs at a time when fiscal deficits and debt servicing burdens are already under scrutiny," said Lloyd Chan, senior currency analyst at MUFG.  

A rise in U.S. rates could wipe out any burgeoning yield appeal for the yen following a BOJ hike and limit the potential for the Japanese currency to strengthen much further. 

"We believe it is premature to conclude that the 155 to 165 range for dollar/yen should be revised lower," strategists at JPMorgan said in a note.

Elsewhere, the Chinese yuan traded around 6.705 per dollar in the offshore market, hovering near its highest in nearly four years, after data showed China's producer and consumer price inflation rose due to higher energy costs.

(Additional reporting by Jiaxing Li in Hong Kong; Editing by Stephen Coates, Lincoln Feast and Kate Mayberry)